My transmission was falling out of 3rd gear while cruising at around 45 mph. I figured the clutch packs must be fine since it has a 3rd gear, but I dropped the pan to see what looks like clutch plate at the bottom. It looks bad to me but I'd appreciate the advice of someone more experienced. Thanks in advance.

 

If your transmission was a cartoon character…...

 

I have no trans knowledge, but that doesnt look good

 

That's certainly clutch plate friction material .
I don't think I've ever seen clutch friction material just flake off the clutch plates like that.
By chance , did you put synthetic trans fluid in this trans ?
It will certainly need a complete overhaul and the converter flushed or replaced .

 

Also look close for traces of antifreeze. That will destroy clutch linings quickly. If you see any check the radiator transmission cooler for leaks.

Given the earlier issues you were having I'd say it's rebuild time.

 

It had gotten some water in through the dipstick hole and I thought I got it all out by dumping the pan before running it but maybe not. That was 100 miles ago so I thought I was in the clear. Also, come to think of it I had topped it off with some +4 recently. The biggest mystery to me is how that thing was shifting normally at all like that. In any case, I guess it's time for a rebuild and new torque converter. Thanks for the answers.

 

I was going to say looks like moisture. That is probably why the clutches are coming apart in chunks. Rebuild time.

 

Forgot to post a follow up; here was the culprit:

 

Yeah, that will do it.

 

The more likely culprit was the "+4 " he added . I assume that by "+4" the OP meant synthetic fluid .
Synthetic oils should not be used in these older transmissions because the synthetic oil will dissolve the glue that binds the fiber to the metal on the clutch plates .
Synthetic fluid should only be used in transmissions that were built to use it .

 

Thoroughly flush the lines and trans cooler before reinstalling.

Good luck!!!

 

Somewhere in the past that transmission had water in it. Maybe the cooler in the radiator failed and allowed antifreeze in the oil, or it was parked in a lake, but water causes that kind of damage.

Atf+4 is over kill for these transmissions, but the kind of fluid does t really matter. The crappiest fluid sold today is far better than anything available when these cars were new.