Let's assume for a second the password consisted of 20 genuinely random characters out of a character set of, say, 62 characters (lowercase/uppercase letters + numbers). That gives you 119 bits of entropy.

If you're the attacker and your goal is to do 1000 (≃ 2^10) rounds of SHA1 for each of those 2^119 potential passwords, couldn't you then just try to brute-force the 128-bit key directly, since 119 + 10 >= 128?

Put differently, wouldn't the statement "A fully random 20-character password has been cracked" amount to saying "AES-128 has been broken"?