Kickstart fails with error message "error: unpacking of archive failed: cpio: Bad magic"

Issue

While testing kickstart to build RHEL6 beta2. Everything appears to go fine thru files systems and package installs, but it dies near the very end trying to set the root password.

Looking into it a little deeper, we discover that actually most of the packages are not being installed because of cpio errors:

Installing setup-2.8.14-10.el6.noarch
error: unpacking of archive failed: cpio: Bad magic