(Bloomberg) – The U.S. government panel that decided MetLife Inc. was too big to fail erred by not evaluating the insurer's vulnerability to financial distress, according to the federal judge who rescinded that designation last week.

That finding was one of several underpinning U.S. District Judge Rosemary M. Collyer's March 30 legal opinion which was unsealed Thursday. Collyer had previously issued just a two-page order stating her conclusion and offering only bare indications for its basis.

Collyer said in her opinion that the Financial Stability Oversight Council's action was "arbitrary and capricious" and that the panel didn't follow its own guidelines in concluding that MetLife was a threat to financial stability.

"FSOC reversed itself on whether MetLife's vulnerability to financial distress would be considered and on what it means to threaten the financial stability of the United States," the judge said in a 33-page decision.

MetLife shares surged 5.3% to $44.73 by that day's end as investors reacted to the court decision and speculation grew about its implications for other banks and non-banks labeled as systemically important financial institutions by FSOC.

FSOC determination

Attorneys for New York-based MetLife argued in February that FSOC's determination was arbitrary and that the panel — which includes Treasury Secretary Jacob Lew, Federal Reserve Chair Janet Yellen and seven more voting members — hadn't considered the economic effect of subjecting the biggest U.S. life insurer to new capital requirements.

Government lawyers defending the designation had emphasized the insurer's interconnectedness to financial firms around the world and asked Collyer to defer to the "considered judgment" of FSOC's panel members.

MetLife Chief Executive Officer Steve Kandarian had fought the SIFI label, saying his firm is well regulated by state watchdogs and isn't vulnerable to sudden withdrawals like banks.

The escape from SIFI status may free up $2.5 billion or more that could be returned to shareholders, according to John Nadel, an analyst at Piper Jaffray Cos. Kandarian had scaled back share buybacks as federal regulators worked to finalize tighter capital standards for non-bank SIFIs.

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MetLife judge found fault with FSOC too-big-to-fail review

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