This all sounds way too familiar.. but thankfully without the gender reassignment attempt.

I used to work at a place where there were protected induhviduals. No matter what they did or said or how costly their mistakes, they continued to have a job and it was very demoralizing (At one point, one of these people was protected by publicly blaming the biggest mistake he made on an entirely innocent group). The boss was the one doing the protecting, so it was difficult but we started complaining to him. When that didn't work, we went to HR. Unfortunately, that didn't work either, so we went over all their heads to our corporate office.

In true Dilbertian fashion, corporate's subsequent investigation unwittingly was headed by the same boss who was protecting the problem people. Care to guess what the result of the investigation was? One of results was that the most egregious example of the protected people was promoted and given a bonus. Then the boss' wife started working there. Right away there were problems with her which culminated in her telling us how incompetent we were and how we should all be let go for outsourcing to India. This was the last straw for several of us and they ended up losing ~25 years of experience in less than 6 months. I heard from my former co-workers that after we all left, corporate did another investigation but this time they didn't let the boss run it: the boss' wife was forced to "resign" about a week later and the boss took a major dressing down from corporate.

Those of us who left are much happier now. We all ended up in better jobs. One of my former co-workers' ulcer healed almost immediately after he left. Another is heading up a department in a different state. I got a much better job with a better title, more pay, a healthier environment, and it's even closer to home.

In the end it all worked out, but you have to possess the "nads" as you put it -- providing they haven't been punted into the next cubicle by your co-worker -- to stand up and tell the truth. And don't let a lack of documentation be the issue. Start keeping track now. People like this don't suddenly start behaving properly, so it would just be a matter of time before you had more than enough examples so that your boss will either do what he should have done long ago... or not. But at least you'll know and can make up your mind if that's the type of environment you want to remain in.

Good luck. You'll probably need it!
---J