Public Heel...
Your result of the scenario presented is probably as good as any. Remember that no matter what happens with Iraq, Saddam is a side show for the bear market, not the cause, so the net result will always be a resumption of the bear market.
I will say that I believe that your "backdown" scenario is the least likely of all possibilities partly for the reasons at the end of your post - "Saddam, with his missiles and WMD's, will still be there, and he'll be a much bigger hero in the Arab world."
mlsoft