What appears to have happened is that the two bearings associated with the pinion gear spun the double race. This happens when someone tightened the two large pinion nuts down without thought that they are for the purpose of establishing pre-load on the two bearings and should be adjusted properly. With the two bearings locked tight against the double race something has to give. What gives is the double race pressed into the banjo. It spins instead of the two bearings and wallows out the banjo housing. it also gets extremely hot.
The repair for this is an overhaul of the rear axle assembly and replacement of the banjo. During the overhaul all of the bearings, races, and seals should be replaced with the pre-loads on the pinion and on the carrier established and the backlash properly adjusted.
Normally the double race in the banjo is pressed in very tight and is only removed with the proper tool. At swap meets I pick up banjos for use as replacements when a job comes in with the race spun. I will only buy one that still has the race installed. If the race is missing I feel certain that it fell out as nobody would go to the trouble to remove the race only to discard the banjo.
Tom Endy