Soak the hanks for a couple hours in hot tap water and a little handwash Ivory liquid dish soap or shampoo. When the water is cool rinse well in more cool water, gently squeeze out water (don't wring), drip dry over the tub on plastic hangers, and then wind into balls. I've never had a problem with that obnoxious thrift store smell after a good hot soapy soak. The hot water also serves to unkink the yarn, just don't wring/agitate wool or it might start to felt.
Some people balk at the idea of "washing" wool in hot water but it has never been a problem for me. This isn't exactly washing, you're letting it soak. You don't want to agitate the wool or let hot water fall on it from the faucet, treat it gently. (In order to dye yarn you soak it in very hot water, which is much hotter than anything that comes out of the tap.) If you're still worried then test it out first with a mini hank or use warm/cold water, you make the call.
When recycled yarn is dry there is often a little wave where the kinks were but it looks great knitted up and I've never felt the need to steam it to make it completely straight. Winding the yarn into balls after its dry helps straighten it out even more, but wind gently so the yarn isn't stretched out of shape.
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