How could I clean this up with Keyboard Maestro

I'm sure these people are giving you good advice, but my Filter Utility can do it all in one action, assuming you pass the data into my macro using a variable, like this:

However for this to work you have to make a tiny change to my macro, changing this action:

to this:

(I was planning to make that change for v1.1 of my macro.)

This solution may give you a few things to handle separately. For example, I don't know what app you are using so I don't know if this will deal with the bullets properly. Also, you may end up with a leading or trailing space, but that should be easy to fix. Also, I didn't deal with the copy/paste part of your problem, partly because I don't know which app you are using.

My macro can be found here:

My macro is designed to work with plaintext, while your problem also requires dealing with an app that is probably RTF, not plaintext. But my macro can still do most of the heavy lifting in a really simple interface for you.