Four hundred thousand checks mailed out as part of the government’s foreclosure settlement with 13 banks have been returned to Rust Consulting, the firm that mailed them. Bryan Hubbard, an OCC spokesperson, says efforts are underway to track down better addresses for the recipients of these checks, some of which are worth up to $125,000.

Who’s paying Rust to do this work? The 13 banks that agreed to the government settlement pay Rust, Hubbard told me. These banks include Bank of America (BAC), Citigroup (C), J.P. Morgan (JPM), Goldman Sachs (GS), Morgan Stanley (MS), and Wells Fargo (WFC), among others. Rust would not provide information for this article on how the contracts with the banks were negotiated or information on the terms of those contracts.

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Rust’s parent company is SourceHOV. Up until March, Apollo Global Management owned SourceHOV. Now, Citigroup, one of the 13 banks involved in the settlement, has that privilege. Citi Venture Capital International Private Equity (CVCI) “has an established track record of successful investments in the business services/outsourcing space; Source HOV fit nicely into our parameters,” Citi spokesperson Danielle Romero-Apsilos wrote me in an email.

For Citigroup, the stake in SourceHOV is a hedge of sorts, though perhaps an unintentional one. When Rust gets bank settlement business, including settlements like the one involving Citi, it generates revenues for SourceHOV, the company Citigroup owns.

But should a bank be able to remove the sting of its own regulatory settlements with hedges like these?

Citi’s private equity “investment is made pursuant to Merchant Banking Authority, and as such, it has no day-to-day responsibilities of the company,” Romero-Apsilos said. In 2002, the FDIC defined merchant banking as “negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies” and noted that the Gramm-Leach-Bliley Act of 1999 expanded banks’ merchant banking powers. “Merchant banking has been a very lucrative and risky endeavor for the small number of bank holding companies and banks that have engaged in it under existing law,” the FDIC wrote.

Merchant banking has recently attracted scrutiny over banks’ roles in the commodities markets, including J.P. Morgan and Goldman Sachs’s investments in metals warehousing businesses.

But more attention is needed. Both the SourceHOV and commodities examples raise the specter that banks might be using merchant banking powers in other ways we don’t even know about that may be contrary to public interests.

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To address the risks, one non U.S. bank is looking to take action. The Wall Street Journal reported last week that Swiss bank Credit Suisse had entered “advanced talks to sell a multibillion-dollar private-equity business as the bank adapts to stricter rules for managing capital and risk.”

U.S. banks should be doing the same. Too big to manage banks need to go on a diet, and if they don’t on their own, legislators and regulators should see that they do.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (
http://thevaluealliance.com
), a board education and advisory firm.