I see the reaction shaft look like that a lot. There isn't any contact there so the factory didn't machine it down nice and pretty. Look down inside of the pump at the converter bushing and I bet it'll be what's chewed up and causing the shavings. Pay particular attention to the bushing and see if it looks like it's worn on one side more than the other. If it is wore on one side more it sounds like the trans to engine alignment isn't correct. That can happen if the block was align bored a bunch which raises the crank in the main bearing bores. How does the converter snout look? If it's worn too that's another sign it's the converter support bushing that's leaving the shavings. I had that issue with a block I bought. It had never been opened up from the factory yet the crank to cam centerline was .013" closer than it should have been. Apparently it was screwed up in machining and they fixed it by re-boring the mains. I had to buy some adjustable alignment dowel pins and do the setup. It was a bit of work but I've since put about 10,000 hard miles on it with no sign of trouble
