Never seen this before:

 

What dooo I do?

They probably stopped breathing. Despite, believing that them might be lost, I would still put them in the soil about two thirds and see what happens.

Endogenous or mycorrhizal fungi. My best grower last year had some showing during pre-rooting.

Thanks, both of you.

Hoosierbanana, should I wipe it off or should I just leave it and try to root it like any other cutting?

No worries, the fungi lives inside the tree and can be beneficial or just benign. If it were harmful there would be nothing you could do anyway because it is already inside the tissue. 

I thought that was what root initials were.  Am I wrong?

No they are lenticels: what trees use to breathe through their bark. In a moist environment like a bag the cuttings will expand their lenticels and push out a little sawdust like material. Roots don't come out of lenticels, the bark usually cracks from callus expanding underneath and the roots come out the cracks.