"Current financial market and economic conditions present significant risk management challenges to institutions of all sizes," warned the feds. Fourth-quarter MSR results at the country's four giant banks showed signs of those challenges already. Net results were still positive, but showed a mix in fee income and hedging performance, as the refinancing wave that kicked off in the spring abated, and some banks did better than others in adjusting derivatives exposure along with the rate outlook. Wells Fargo ( WFC) appears to have been the most bullish on the potential for an interest-rate hike in the near-term. The bank reduced what is known as its "carry trade" -- a strategy of funding long-term assets with short-term liabilities that have a higher rate of return -- by $34 billion, while JPMorgan Chase ( JPM), Bank of America ( BAC) and Citigroup ( C) all took the opposite tack, increasing theirs on average by roughly the same amount. But whereas Bank of America and JPMorgan lost money on their MSR derivatives, Wells Fargo earned a pretty penny, showing that its early adoption is paying off. Wells held $16 billion worth of MSRs at the end of 2009, a $1.5 billion increase from the previous quarter. It earned $2.1 billion in servicing income, and $1.9 billion in market-related valuation changes, largely from effective hedging. Fair value adjustments accounted for roughly $830 million, while changes in valuation models accounted for a $1 billon gain. CFO Howard Atkins cited "solid results" and "strong" hedging activity. He also predicted that MSR income could remain "relatively high" in the near-term if its strategy continues to pay off.