Finally, what's the correct level of security that Bitcoin needs? A 51% attack would be detrimental, but it wouldn't mean the end of Bitcoin. There are ways to counter and mitigate it, and the worst that would happen is a suspension of transactions until the attack is resolved. So, what's to say that $10M of attack prevention isn't enough? Currently it would cost somewhere in the hundreds of millions, but is that really necessary? I'd be interested to see some analysis in that regard.
A 51% attack is not just a mining pool getting 51%. If some entity got 51% and mined secretly all past transactions could be wiped out from the block they started mining. It could mean weeks or months of transactions could be wiped out. If someone wiped out the last 6 months of Bitcoin transactions I think that would kill it. The cost analysis that I have seen calculated a price based on buying equipment from vendors. A 51% attack like this would mean the entity would make their own hardware. If they had control of places that manufacture chips that would make a big difference with the cost. I don't think it would happen but it is not completely out of the question.
Pulling off a 51% attack and also having the longest chain still won't let you wipe out past transactions. They will still live in other mining chains until they are reconfirmed. You can only really be assured to double spend your own transactions this way. If you have transactions big enough to justify the cost of such an attack, someone will probably notice.