You have a toxic manager. You've listed about 2/3rds of the "warning signs" I keep track of, personally.
- He bypasses you. He's given you responsibility, but not authority. You have been set up as a "fall guy." He may not have used you for that, yet, but that's what you are. You're a scapegoat sitting on the shelf, ready to be used when he needs.
- He "... only wants to hear positives, and is not interested in the negatives." The primary role of a FUNCTIONAL manager/executive is to deal with the negatives. Resource shortages, schedule conflicts, scope creep management, and unhappy customers are all part of a LEADER's role. The job of a leader is to deal with the negatives so that the staff can focus on PRODUCTIVITY.
- He mocks people who raise issues. Now, I am not going to pretend that people who raise issues are always right, but if they're raising issues, there are only two possibilities: 1) There is an issue that needs attention, or 2) The person raising the issue lacks the skills/training to understand the context or some other critical component. BOTH of these possibilities are the manager's problem.
As to what you can do about it: Tough one. This person has "insulated" himself from his responsibilities, and is (probably) quite comfortable, now.
One approach is to start "managing" your manager.
- Ask your team to bring issues to you, and then frame these issues to your manager as "Coming from the team" and not a single person. That should get the mocking under control.
- Ask your team to alert you of any scheduled meetings with the manager about work, and try to be in on them. If your manager pushes back, say, "Obviously, all project issues should be going through me, but I realize you want to include Steve in this discussion, too, as the Widget Interface is his task." He'll be hard-pressed to explain why he doesn't include the team lead on project issues. If he continues, ask your team to start interrupting the boss when he tries to "corner" them and say, "We really need to have Bonner in this conversation, too." (Or something similar.) That should get the incorrect and offensive feedback under control.
In short: Get your team to be a TEAM. FORCE your manager to deal with you as a team, and not as individuals (as much as possible). If you can bring your team together, a good manager will appreciate it, while a toxic manager will be stymied as he can no longer "pick off" employees one at a time.
Your manager will either have to start behaving as a competent leader or will have to explain to your "grand-boss" (BTW - I'm stealing that term) why he's not able to manage his team.
Of course, there is HUGE political risk in this, and if you have a turncoat on your team, they may end-run you and derail this entire approach. You'll have to evaluate your environment for yourself to determine if you think this will work.