1997 Chevy Blazer dirty coolant

1997 Chevy Blazer: 94,700. I took it in for an oil change and the mechanic came out of the shop and wanted to show me something. There was a huge amount of orangish/brown gunk - kind of, like sandy clay stuck to the inside of the radiator cap and all down in the radiator. He suggested that there might be a serious problem with the engine and that it might be all through the cooling system. He said to take it back to the dealership and have them look at it before doing anything else. Has anyone ever seen this before? They also checked the transmission fluid and it smelled burnt and there were some flakes in it (they think might be paint and suggested sanding off the paint on the stick and then oiling it and putting it back in.