I thought this fix suggesting the problem was caused by a missing symlink in /etc/rcS.d but unfortunately that didn't fix the problem.
I have this in my /etc/fstab, but for whatever reason that still isn't working right. I'll have to keep logging in like this:
ssh mymachine "bash -e"
and then mounting /dev/pts manually. Strange, but true. FYI, this is on debian machine.
UPDATE: I scanned /var/log/syslog for udev errors and found this:
kernel: udev: missing sysfs features; please update the kernel or disable the kernel's CONFIG_SYSFS_DEPRECATED option; udev may fail to work correctly
I updated to 2-6-30 and was able to login without any issues. I still have devpts in my fstab, so I guess I should remove it and test it again. I'll do it next week. :-)