Can someone tell me what is happening here?

Looks to me like over the years , somebody was beating on that adjuster, when there is no need .I tighten them up by feel till you get a small bit of end play i am thinking 10 to 15 thou then you need that pointer to lock it in place .That bearing is not supposed to get any oil from the rearend i always just put a small portion of grease in each bearing , i would say it was tightened to the max and ruined the bearing Bearing number is A7 BCA, inner seal number is 8695s National. If you have these green bearings , apparently these are non adjustable , and are a sealed bearing , i personally never used them .