I know this a call out towards me since I was so vocal in the other thread about it.
All I can tell you is that I saw it work first hand.
It was a brand new Ford Excursion 7.3L PowerStroke that had been in a flood and donated to Oakland Technical schools for use in our Automotive Technology class. The transmission was junked because of the water damage. Our teacher showed us how to drop the pan, remove the filter and added the sawdust with new trans fluid. We had already tried a simple trans fluid swap to get rid of the water and the truck still didn't move.
After he added the saw dust and new trans fluid he started the truck and let it run for 20 minutes before he started cycling through the gears. He then put it in reverse, backed it off the lift and into the lot and that diesel ripped one hell of a burn out. He drove it around burning the tires off for about five minutes before it started slipping like crazy and the entire class had to push it back into the bay. We dropped the pan, cleaned out the valvebody of the soaked sawdust pulp and refilled it with more sawdust and he backed it out and ripped another burn out. We parked it before the principal came in and started raising hell and we blamed it on kids from the welding class.
That's what happened. I still don't know enough about how auto transmissions work to explain it. All I know is what I just described.