iPhones' Hardware encryption without Key Management

Jonathan Zdziarski claims that the "hardware encryption" of the new iPhone 3Gs can be bypassed by removing the PIN that somehow manages said hardware encryption.

I don't know how this is implemented, but given that the iPhone OS is not unbreakable, it seems recommendable to manage the key for that encryption in the hardware encryption device, too.

Anyway, if Jonathan can recover the files without giving the PIN (we have to take his word here, as the clip does not really demonstrate it) something is really wrong there.